Principles Applicable To An 'insolvent' Trust In Jersey

• Published date: 31 May 2021
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Trusts
• Law Firm: Ogier
• Author: Mr Daniel Maine

It is important that trustees understand their obligations if their trust structure comes under financial stress. Helpfully, the Jersey courts have provided guidance on the principles applicable to 'insolvent' trusts, which is likely to be highly persuasive in other jurisdictions.

When is a trust insolvent?

As the Royal Court noted in Re Z Trusts [2015] JRC 196C, "[t]o talk of an insolvent trust is, of course, a misnomer. A trust is not a separate legal entity and cannot, as a matter of law, be insolvent." Nonetheless, the Court described the term as a useful shorthand.

Whether a trust is insolvent is determined using the cash-flow test: is the trustee unable to meet its debts as trustee as they fall due out of the trust property?

Why does it matter?

Insolvency in a trust brings about a shift towards the interests of creditors (analogous to that seen in company law). This means the trust should be administered by the trustee on the basis that the creditors, not the beneficiaries, have the economic interest. Importantly, the trust is to be administered for the benefit of the creditors as a class, not simply a majority of them.

Trustees may find administering a trust for the benefit of creditors to be an unusual and uncomfortable experience. The Royal Court has cautioned that "[t]he trustee or fiduciary of [an insolvent] trust would be wise ' to exercise their powers either with the consent of all of the creditors or under directions given by the Court".

What insolvency regime applies?

In Re Z Trusts [2015] JRC 214 the Royal Court concluded it has a discretion as to the appropriate insolvency regime to implement, reasoning as follows:

• The starting point for the Court is to supervise the administration of an insolvent trust in the interests of the creditors.
• On the facts, the trustees had the power to appoint insolvency practitioners (IP) voluntarily to assist them in the administration of the trusts and to delegate tasks to them (whether this is the case in other trusts will depend on the terms of the relevant trust deed and the circumstances of the trust and its creditors).
• There is precedent for the Court appointing receivers over trusts, but this power has been exercised rarely and there was no obvious example of this being done in relation to insolvent trusts.
• However, the Court does in principle have the power to make such an order given the breadth of its inherent supervisory jurisdiction.
• Non-exhaustive examples of where it may be appropriate to make...